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The Shape of Things to Come

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Authors: Chris Cook & Mahmood Khaghani*

Like everyone else, Iranians observed the extraordinary U.S. oil market events of 20th & 21st April 2020 and wondered what on earth was going on, and what it means for Iran’s future as a major oil producer.  In Tehran, in October 2008 I recall similar astonishment as the global dollar financial system experienced a meltdown from which Iran was safely insulated. 

It has been said that history does not repeat itself, but it does rhyme. Once again, Iran is insulated from market turmoil through US financial and physical oil market sanctions and is ‘on the outside looking in’. Global lockdowns are believed to have cut oil product demand by up to 30m barrels per day and this demand shock is propagating up the supply chain of refineries and oil distribution systems to producers at the well. 

Market shocks
Coronavirus has shocked the physical oil market into cardiac arrest. Fragmented and viciously competitive producer members of oil institutions such as OPEC and “OPEC+” have no viable response. The media stories everywhere of a Saudi/Russia “Price War” reminded me of two bald men fighting over a comb, because there is no physical demand other than for strategic reserves even for cheap oil until product oversupply is cleared and shut down refineries re-open.

Of course, this is not the first oil market cardiac arrest. In 2008, oil prices went into free-fall from a clearly manipulated ‘spike’ to $147/bbl in July 2008 all the way to $35/bbl in December and nothing OPEC did could arrest the fall. The reason was that the 2008 shock was not due to any lack of physical demand to refine oil, but rather to the inability of buyers to finance global oil deliveries as the dollar trade finance banking system froze as banks lost trust in each other.  In order to understand the current market cardiac arrest and how to revive the patient, I shall outline my perspective of US physical and financial energy strategy since 2008. 

Obama: Transition through Gas

The organising principle of US foreign policy has for 100 years been US energy security and independence and President Obama’s smart Transition through Gas energy strategy reflected this. The aim of Transition through Gas was to reduce US reliance on Saudi oil by increasing US oil production and to swing domestic and global energy investment to gas & renewable energy production and energy efficiency (‘Fifth Fuel’). 

Obama was a Wall Street president who took an unconventional approach to funding such colossal energy investment.  His strategy followed that of Henry Kissinger who convinced the Shah of Iran to agree to a 400% increase in oil prices after the 1973 ‘Oil Shock’ which had the effect of making development of Alaska, US Gulf, and North Sea oil economic. So immediately Obama took office in 2009 he acted to re-inflate, support and hold oil prices above $80/barrel for four years while capping politically sensitive US gasoline prices to avoid putting at risk his 2012 re-election. 

This four-year oil boom with prices between $80 & $120/barrel brought a wave of petrodollars from producers flooding into US Federal Reserve Bank (“Fed”) accounts, particularly from Saudi Arabia under an energy security agreement with U.S. made in 1945. To avoid exchange rate problems, the Fed created new petrodollars and swapped them for US Treasury Bills in a neutral asset swap operation termed Quantitative Easing (“QE”). However, the economic myth propagated by the Fed and sustained by uncritical global media was that this neutral financial asset swap could in some magical way act as a “stimulus” for the US economy when the true reason was to quietly accommodate oil producer Petrodollars. 

In order for oil producers to support high oil prices, they must be able to fund stocks of excess oil held off the market and be able to access bank finance for the flow of oil payments. In order to achieve this, Wall Street used new investment instruments: firstly ‘passive’ oil funds investing in oil market futures contracts, and secondly, secret Enron-style oil prepay funding.  

In this way, Wall Street and North Sea oil producers were able to support the global benchmark price set by ICE Brent/BFOE crude oil contracts, and Saudi Arabia’s BWAVE pricing formula based on it. From 2001 to date the North Sea oil market tail has wagged the global oil market dog.

So the vast inflows of petrodollars during President Obama’s first term in office enabled US banks to fund shale oil & gas and renewable energy projects, while historically high US fuel prices encouraged energy-efficient vehicles. By 2014 the US had transitioned from natural gas deficit to surplus; US shale oil production had increased by some 5m bpd, while fuel consumption had fallen by 2m bpd. Similar trends elsewhere of increasing supply and falling consumption saw structural global oil deficit quietly transform into a surplus.

In late 2011 in Tehran, with oil prices well over $100/bbl, I forecast to general disbelief that when the Fed ended QE, the oil price would collapse to $45/$50 bbl. This is exactly what happened when the US finally turned off the QE dollar hosepipe in 2014 while opening a massive military base in gas-rich Qatar. The US also commenced overtures to Iran bearing in mind both the greatest global gas reserves and immense development opportunities for low-cost oil long coveted by US oil majors.

In late 2014, Saudi Arabia awoke from a petrodollar coma to see their power over the US vanish along with their energy security. As a result, Saudi Arabia redirected oil proceeds to the Euro, where a main aim of European Central Bank policy since inception has been to back Euro currency with no intrinsic value with lending based on objective utility of oil and gas energy. So as with Fed dollar QE, the true reason for Euro QE in March 2015 was not stimulus but was simply to accommodate purchases of € securities. 

However, the unexpected election in November 2016 of President Trump changed everything.

Trump and energy dominance

Perhaps the most important of President Trump’s motivations, due to an intense personal animosity, is to erase Obama’s political legacy and in particular his energy strategy.  But it was a surprise to many observers that Gary Cohn (ex-Goldman Sachs and a Democrat) as Director of the US Economic Council and Rex Tillerson (ex-Exxon CEO) as US Secretary of State were willing and able to serve the Trump administration

Cohn architected and co-founded in 2001 what became the globally dominant Intercontinental Exchange (ICE) through which Wall Street came to dominate and financialise oil markets, while Tillerson was the most powerful US oil executive by far. Together they devised and implemented the US Energy Dominance strategy which was announced by President Trump on 29th June 2017.

As the name suggests, President Trump’s ‘America First’ doctrine when applied to oil and gas markets aimed to massively increase US production in order to dominate global markets with what officials have termed “Molecules of US Freedom” and so take back control of global oil market pricing via oil & gas exports.

So on 1st July 2017 after 16 years of pricing oil using the ICE BWAVE formula, Saudi Arabia switched to prices generated by the Platts reporting service for cargoes of Brent/BFOE oil. For six months huge passive fund investment poured into global oil futures contracts, thereby re-inflating the price. Three months later at the end of March 2018 and nine months to the day after the strategy commenced, Cohn and Tillerson simultaneously left the Trump administration, leaving the strategy to be rolled out over the next two years.

So for the next 18 months, the Fed steadily reduced its balance sheet by selling Treasury Bills to release dollars. Within six months in September 2018, the ECB ended Euro QE, and Fed Treasury Bill sales continued until September 2019. 

U.S. and the oil standard

Whoever was responsible for the Abqaiq attack on Saturday, 14th September 2019, the resulting spike in oil and product prices required massive amounts of dollar funding to cover losses on derivative contracts. So Monday 16th September saw an unprecedented ‘spike’ in the sale and repurchase (“Repo”) of US Treasury Bills through which the Fed supplies dollar liquidity to four major US clearing banks. However, this massive Repo spike was only the beginning: from then on, the programme of exchanging dollars for short term Treasury Bills involving only these four banks which became known as ‘NotQE’ continued at a rapid rate.

Meanwhile, through the second half of 2019, oil prices were otherwise stable in a range between $55 and $60/barrel. The more the price exceeded $60/bbl the more shale producers sold oil forward, which enabled them to borrow from banks to finance drilling. When prices fell below $55/barrel, financial buyers appeared.
As a result, the US petrodollar funding system has quietly been completely reconfigured, as Saudi PetroEuros returned to U.S. to be swapped for short term Treasury Bill petrodollar holdings. Where petrodollars indirectly funded shale oil producers through bank lending, shale oil production will now be funded via the same three-way prepay mechanism used by Enron for a decade to secretly defraud their investors and creditors. The difference now is that where Enron’s third-party funders were two of the Big Four private banks, now it is the Fed itself which is the third party funder.

Meanwhile, the waves of debt advanced to the US shale oil industry are beginning to come due and the Big Four banks are all preparing to foreclose on these debts and take ownership of shale oil assets. These banks plan to use production sharing LLC ‘capital partnerships’ with operating partners while oil majors such as Exxon appear also to be aiming to consolidate distressed shale oil assets using similar funding.

So to cut a long story short, the planned outcome of the US Energy Dominance financial energy strategy, was to support and loosely peg oil prices by controlling the benchmark price around $55 to $60/barrel.  By pegging the dollar to an “Oil Standard” in this way prepay funding of US oil reserves has essentially monetised US oil 

Enter the dragon

Producers have controlled the oil market for so long they believe this to be their God-given right, forgetting that buyers are also capable of asserting market power. For years China’s energy strategy has been to build and fill enormous oil storage capacity, now in excess of 1.2 billion barrels, while a fleet of new and efficient oil refineries has been built with capacity well in excess of China’s product needs, and aimed at exports. 

As Iran is painfully aware, China’s ability to ignore US sanctions means that they have become oil buyer of last resort at distressed prices, and may, therefore, dump cheap oil products into the market with which other refiners cannot compete. China has also discussed cooperation with other major oil buyers, particularly India. Other countries in oil deficit, notably EU nations, also have an incentive to join a cooperative ‘buyer’s club’.

So in my view, China has been preparing for years to assert ‘buy-side’ consumer oil market pricing power and the unprecedented demand shock propagating from China has created the perfect opportunity. When the oil market recovers from this cardiac arrest which broke the US/Saudi oil peg I believe that China can and will assert buy-side market power, probably in loose cooperation with other major consumers who see no reason to continue to transfer up to an additional $30/barrel to producers.

Oil wars

The story of a so-called oil war between Saudi Arabia and Russia aimed at killing off US shale oil production is a myth: the true struggle for market share appears to be an attempt by a US/Saudi Arabia partnership to out-compete Russian oil sales to Europe and elsewhere. Whatever the geopolitical truth of it, the collapse of product demand far in excess of any feasible voluntary oil production cuts makes talk of market share redundant, when there simply is no market to share.

So once enough refineries shut down to allow surplus oil on the market to begin to clear and a physical market price to re-emerge we will see two struggles begin. Firstly the struggle between buyers and sellers, and when, as I expect, the buyers win, the continuing struggle for oil market share between producers.

In my view, the crazy spike in prices of the US WTI oil futures benchmark price to a negative price of $37/bbl represents a historic point of failure from which the contract will not recover. It seems to me there is now an urgent need for a temporary resolution of the broken oil and products markets while a transition to new and sustainable global energy and financial markets get underway.

On the outside looking in
 
As the great author, Arthur Conan Doyle wrote: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth” 

Iran now has no options other than to pursue improbable and unorthodox market solutions in order to resolve an impossible economic situation, by a two-stage process of resolution and transition. The resolution step is to re-purpose existing structures and infrastructure with no change in the law. This then provides the basis for proof of concept of smart market and energy fintech innovations which enable transition to sustainable low carbon and low cost physical and financial solutions.

Resolution

My colleagues and I have long promoted 21st C Iranian physical and financial markets in oil products, but these have always been resisted by vested interests.  However, global collapse of product prices has now seen Iranian product prices converge with neighbouring countries, thereby neutralising certain vested interests. Our proposal for an interim resolution of Iran’s economy builds upon existing subsidy and rationing policy and technology for oil products.

Firstly, our innovation is to simply for the government to issue an “Energy Dividend” of vouchers or credits, to Iran’s population, each of which will be accepted in payment for products.

Because the Euro 5 standard for gasoline is used throughout Eurasia, we propose that each “Energy Credit Obligation” (ECO) will be returnable in payment for 1 litre of Euro 5 gasoline. Such standard ECOs will also be accepted by refiners and distributors, in payment for other fuels at a discount or premium to Euro 5 gasoline.

Refineries who issue such ECOs would no longer buy crude oil in exchange for conventional currency such as riyals or dollars since to do so exposes them to the risk of oil price fluctuations. Instead, refiners will enter into production sharing partnership agreements or oil/product swaps with oil suppliers in exchange for a percentage entitlement to the flow of ECOs.

So the ECO represents prepayment backed by the Iranian government and energy complex for the eternal intrinsic use value of energy, and in uncertain times many investors seek such assets. In order to build trust in the ECO, issuance must be transparent to everyone, and I addition must be overseen by professional service providers with a stake in the outcome who manage issuance and redemption of ECOs against use.

Transition

The ECO represents a fixed point upon which 21st C smart energy markets and economy may be introduced by Iran’s greatest resource – one of the greatest global pools of intellectual capacity – to collaborate in solving humanity’s greatest challenges.

*Mahmood Khaghani, former director-general of the Caspian Sea and Central Asia Department at Iran’s Ministry of Petroleum. He is now an advisor to IRIEMP- University of Tehran & Education and Research Institute -ICCIMA

From our partner Tehran Times

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Massive Lying About the War in Ukraine

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The chief purpose of the Western sanctions against Russia, after Russia invaded Ukraine on 24 February 2022, has been to stop Russia’s sales of energy — mainly pipelined Russian gas — to Europe. Russia had been the top supplier of energy to Europe, because its energy was by far the cheapest in Europe. It was the least expensive to produce and sell to Europe, largely because it was pipelined into Europe whereas other suppliers needed to containerize and ship their gas and oil to Europe — which is far costlier to do. In all of Europe, virtually the only energy that is pipelined comes from Russia. Therefore, the sanctions that prohibited Russian energy to be supplied to Europe caused energy-prices in Europe to soar.

However, Western ‘news’-media don’t blame the sanctions for Europe’s soaring energy-prices, because those sanctions come from the U.S. and have the cooperation and participation by European governments. Here are the main ‘causes’ of Europe’s soaring energy-prices according to U.S.-and-allied ‘news’-media (and you will see examples from Western Governments and ‘news’-media there simply by clicking onto each one of these phrases, each one of which is linked):

“Russia’s cutting off the gas to Europe”

“Russia strangling Europe”

“Russia’s energy war”

“Putin’s energy weapon” 

So: each of those ‘news’-media is routinely lying to their audience in order to place the blame for Europe’s soaring fuel-prices upon the Government of Russia, instead of upon the Government of America and upon its various vassal-Governments in Europe that constitute together the EU. 

In addition to using those lying phrases, U.S.-and-allied ‘news’-media use distractionary and misleading ‘explanations’ of the soaring prices. For example, the American and German-owned Politico ‘news’-site headlined “Why cheap US gas costs a fortune in Europe”, and ‘explained’ that “The liquefied natural gas (LNG) loaded on to tankers at U.S. ports costs nearly four times more on the other side of the Atlantic, largely due to the market disruption caused by a near-total loss of Russian deliveries following the invasion of Ukraine.” What caused that “near-total loss of Russian deliveries” isn’t so much as even discussed in their ‘news-report’, and the word or even concept of “sanction” doesn’t even appear once in the article. That’s how propaganda — NOT news — is done. Their ‘news’-report instead discusses whether the U.S. suppliers, or instead the European middlemen to whom they sell American liquefied natural gas, is to blame, but, of course, all such discussion is distractionary, instead of at all explanatory, of the question “Why cheap US gas costs a fortune in Europe”. This is the way to deceive Europeans into re-electing their politicians who serve U.S. billionaires instead of European consumers.

A comedic, but also extremely informative, documentation of the absurd extent to which U.S.-and-allied Governments and media go in order to pretend that these cut-offs of Europe’s least-costly energy are due to Russia instead of to the U.S. can be seen in the 8-minute video by Matt Orfalea, “Who Blew Up Nord Stream Pipelines? | A Mystery!”

To see some of the many OTHER tricks that U.S.-and-allied ‘news’-media use in order to deceive Europeans to vote for the politicians in these U.S.-vassal-nations (propagandistically called U.S. ‘allies’, instead), I have provided many more examples in my prior “Debunking Lies About the War in Ukraine”. That article, combined with this one, presents a fully documented (in the links) and comprehensive picture of European Governments as serving U.S. billionaires instead of European consumers. If what it says is true — and you can easily decide that for yourself by clicking onto any link anywhere that you doubt what is being alleged there — then you will know that your Government doesn’t care about you, at all, and is instead serving America’s billionaires, at your considerable expense.

In order to keep those U.S.-and-‘allied’ weapons flowing to Ukraine so that America can defeat Russia in the battlefield of Ukraine by using Ukraine’s army instead of America’s soldiers, the lies that have been documented here need to be believed by Europeans — and they are (or at least have been) believed by Europeans. The tricks have been working, thus far.  

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Oil Price Threshold: Action and Reaction

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The introduction of a price threshold for Russian oil has been discussed for several months. The idea was announced back in early September in a statement by the finance ministers of the G7 countries. Its essence was to prohibit the transportation of Russian oil and oil products by sea in the event that the contract price exceeds a predetermined price level. Along with transportation, there are related services—insurance, financing, brokerage services, etc. A “price threshold coalition” was formed, which, along with the members of the G7, included Australia and the EU member states.

Washington, London and Brussels have already developed legal mechanisms for the new restrictions. On December 5, oil price restrictions should come into force, and in February, they are expected to be applied to oil products. The initiators of the sanctions expect attempts to circumvent new sanctions and are trying to cement possible loopholes in advance. What kind of workarounds are expected among the Western countries, and what are the chances they’ll be able to impose a price cap on other countries?

The price threshold for oil is a relatively new and non-standard variety of economic sanctions. The most common and universal instrument of modern sanctions are restrictions on exports and imports, as well as blocking sanctions. The latter entails a ban on any financial transactions with individuals or organisations included in the lists of blocked persons. The Russian oil industry has already faced a wide range of export and import restrictions. The US, EU, UK and a number of other countries have introduced or are gradually introducing bans on the supply of oil and petroleum products from Russia. They have largely blocked the supply of equipment for the domestic energy sector. Even before the start of the special military operation, a number of large Russian oil companies were subject to sectoral restrictions in the form of a ban on long-term lending and a ban on deliveries in the interests of individual projects. It turned out to be more difficult to impose blocking sanctions. A number of top managers and major shareholders of Russian oil assets were included in the lists of blocked persons. However, the West did not dare to block the companies themselves; Russia is too large a supplier of oil to the world market. Blocking the financial transactions of Russian suppliers would lead to a panic in the market and an astronomical rise in prices. Collateral damage is the only thing stopping the West from blocking Russian oil companies.

A price cap was proposed as a softer measure. The US and its partners are betting on the fact that Western companies control significant volumes of transportation and insurance. They are also betting on the dominance of the US dollar in global financial markets. Russian producers are being driven towards a situation in which they will either have to sell oil within the price threshold, or it will simply not be delivered. In addition, such cargo will not be insured, and financial transactions involving banks from the “threshold coalition” will become impossible. Moscow has already threatened to stop supplies to those countries that go ahead and implement the decisions of the “coalition”. But the “coalition” itself has largely given up on Russian oil anyway. India, China and other friendly countries may not join, but Western carriers will not deliver Russian oil there.

The initiators of the sanctions expect a number of schemes to be attempted to circumvent the new measures. The first is the formal observance of the price threshold, but manipulations with the price of transportation or other related services. The US Treasury is warning carriers, insurers, bankers and other market participants in advance that commercially unreasonable rates will be considered a sign that the price cap regime is being violated. The concept of commercial justification is not disclosed, but the signal itself is fixed. Another possible circumvention option is the distortion of documentation, which can take place both on the supplier’s side and be the result of collusion between the supplier and the carrier. In this case, carriers are recommended to keep all the documentation of the transaction for five years, and insurance and other service providers must have a clause in contracts that the oil being transported is below the price threshold. The presence of such archives does not insure against violation in itself. But it allows the regulator, in case of suspicion, to quickly check the history of transactions. Companies can get off relatively lightly for unintentional violations, but deliberate circumvention is fraught with criminal prosecution. Another way around is to mix Russian oil with an oil of a different origin. So far, clear criteria for such proportions have not been defined, although the US Treasury calls for caution in such transactions. In determining these proportions, the EU may take into account the clarifications of the European Commission on mixtures subject to import restrictions.

The experience of US law enforcement practice shows that there will be violations of the sanctions regime, and US regulators have developed mechanisms for detecting them. The EU and the UK have less experience, which does not exclude the active prosecution of violators. However, the indicated methods of circumvention still seem to be “mouse fuss”, which will not systematically solve the problem for Russia. In Moscow, much more ambitious steps can be developed.

The most obvious measure is to build up Russia’s own tanker fleet. Reports of such steps have appeared in the foreign media, although reliable estimates are difficult. In the hands of the US, the EU and other initiators, there is a means to counteract. They can simply add Russian oil tankers to the lists of blocked ships. Then their service in foreign ports will be significantly hampered. Secondary American sanctions and fines are feared even in friendly countries. The experience of secondary US sanctions being used against the Chinese COSCO Shipping Tanker and some other companies for the alleged transportation of Iranian oil in 2019 can serve as a warning. The European Union has also provided for a mechanism to punish ships carrying Russian oil above the price ceiling. Violating ships will be denied financial, insurance and other services in EU jurisdiction. The wording of paragraph 7 of Art. 3n of EU Council Regulation No 833/2014 suggests that we are talking about any ship, regardless of the country of origin.

Similar problems may also arise when a Russian insurance company is set up to serve bulk oil shipments, or if one or another company from friendly countries is involved. Here, the United States and its allies also have the instrument of secondary sanctions in their hands. The same goes for financial transactions. Operations in the currencies of the initiating countries will be blocked. Here again the question of settlements in national currencies comes to the fore. The big question is, whether the banks in friendly countries run the risk of the same secondary sanctions in case of transactions above the price threshold. The legal mechanisms for such sanctions specifically for the price threshold have not yet been spelled out. However, they may appear at any moment, or the initiating countries, primarily the United States, may provide an explanation of the application of already existing norms to the price threshold. This happened recently with explanations of possible sanctions for using the Mir payment system in the interests of blocked persons.

In the bottom line, the participants of the “threshold coalition” do not have to seek the entry of more countries into their ranks. It is enough to threaten with secondary sanctions or coercive measures in case of revealed violations, or simply block insurance services or financial transactions passing through Western insurance companies and banks in violation of the prescribed norms.

By building up pressure on the Russian oil sector, the US and other initiators of sanctions will use their rich experience of restrictions against Iran. At one time, Washington managed to “globalise” its ban on the import of Iranian oil and services related to such imports. Iran continues to survive under the sanctions, although it has suffered losses. There is no doubt that Russia will also retain efficient ways to supply its oil to foreign markets. However, as in the case of Iran, the sanctions will increase the cost of Russian oil exports.

From our partner RIAC

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Analyzing China Solar Energy for Poverty Alleviation (SEPAP) Program

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photo:Xinhua

In 2014, China deployed a large-scale initiative named as Solar Energy Poverty Alleviation Program (SEPAP) to systematically alleviate poverty in poor areas including underdeveloped regions of western China. In recent years, moving the country toward technological leadership and making China the largest solar investor has been on Government’s central Agenda. While having environmental benefits associated, SEPAP is a multi-purpose project which aims to reduce poverty, promote jobs and income in rural areas, boost China’s solar market, and improve rural lives. It is noteworthy that SEPAP is a program that has harmonized the social, developmental, and industrial goals. SEPAP acquired the highest level of political endorsement after Xi Jinping pledged to eradicate poverty from China by 2020, which resulted in its ascension from the pilot program to a nationwide campaign. According to World Bank, China has lifted 800 Million people out of poverty by 2022 and contributed to the Global reduction of people living in poverty as close to three-quarters. China has become able to achieve this milestone by adopting targeted poverty alleviation strategies and by providing economic opportunities to the unprivileged people to raise their income level.

Through this initiative, China aimed to add 10GW of solar capacity by 2020, which will benefit over 2 Million people. The program targeted 35,000 poverty-stricken villages which were located in 471 counties in 16 Provinces. According to an evaluation study conducted in 2020, this program has resulted in an increase of 7%-8% in the per-capita disposable income of the county. Chinese Government investment in solar energy and using it as a strategy for poverty eradication has brought out positive results and the effects are twice as high in the subsequent two to three years, especially in Eastern China.

Three different contexts contributed to making SEPAP a priority on Government’s agenda, making a historical conjuncture. First was the political push to eradicate prolonged rural poverty in China. To combat the higher rural-urban income gap, China adopted an “industrial” approach that emphasized developing innovative industrial facilities in the unprivileged region to make them self-sufficient in the long run. The second was the significant demand for rural electrification, where former technological preferences, especially small hydropower, were no longer feasible. The third driver was the overcapacity and shrinkage of the country’s solar energy sector and the subsequent necessity to stimulate distributed solar PV installation. Before 2013, China’s solar energy sector was mostly export-oriented with a dominant share of exports in overseas markets in Europe. During 2008 Trade disputes in the EU and US combined with the financial crisis lead Chinese solar manufacturers to the brink of Collapse. So, opening the domestic market for solar consumption was launched as a rescue strategy. The officials favored the installation of the distributed, small-scale solar system that can generate energy that may be utilized locally. By 2013, China becomes the world-leading market for solar energy and by 2015, It reached a total installed capacity of more than 43.18GW. Considering the scenario, SEPAP was formulated with a strategic vision that will benefit the local people while also expanding distributed Solar PV generation and absorbing overcapacity. 

In 2014, SEPAP was launched by National Energy Administration (NEA) and State Council leading group

Office of Poverty Alleviation and Development (CPAD) as two joint policies. A first policy designed two alternatives for policy implementation. Installing rooftop Solar PV systems for low-income families formerly registered with CPAD was the initial option. The other policy alternative was to build Solar Power Station on the non-arable lands near the counties and villages. Using a robust financial model described in policy guidelines, the SEPAP was funded by both Government subsidies and corporate donations as a part of their corporate social responsibility initiatives. The second joint policy includes detailed guidelines for developing pilot SEPAP Projects in six provinces which included 30 counties. The provinces targeted were relatively underdeveloped while having abundant solar resources. Provincial Governments were involved to carry out the implementation process which include collecting comprehensive data on the poor household, energy supply and consumption, and quality of grid connection for each county. After the approval of plans from central governments, they were executed by the county’s government via an open bidding process. Provincial Governments’ poverty alleviation funds and policy banks’ preferential loans were utilized for the financial support of the pilot project of the Program. To ensure accountability and transparency in projects, monitoring and evaluation teams were designed by NEA and CPAD to maintain a check and balance on program activities and construction maintenance. To raise poor household income through this project, the profits gained from the sale of solar power were distributed fully among residents after Tax deductions. The policy goal also guaranteed 3000RMB of annual income per household for more than 20 years. The program created a win-win situation by alleviating the poor from poverty while absorbing China’s overcapacity of solar energy at the same time. 

China’s ambitious plan to align poverty alleviation goals with the expansion of renewable energy has some serious practical concerns associated with it. Analyzing the program leads to significant gaps in policy design and implementation. The program faced severe budgeting and financial problems because of a lack of appropriate arrangements and no detailed financial mechanism was developed for post-construction maintenance of the projects. Only the central government endorsement was not enough to tackle these challenges but consistent support from the banking and bureaucratic sector was the pre-requisite for program implementation. Moreover, proper financial incentives were also required to encourage the solar companies to take lead in the construction of projects. Another challenge associated with the project was the complication in the governance structure where energy regulators took the lead rather than development officials. Misallocation of expertise affected the priorities in agenda setting of the program i.e. energy regulators based on their expertise, advocated the expansion of industrial capacity rather than looking out for poverty and development issues in the local context. Moreover, the time frame designed for the assessment of pilot projects was not enough for the critical evaluation of the success and failure of the project before its transition toward a national program. 

Even though it’s a commendable approach, the combination of renewable energy technology with poverty reduction needs to be further examined through rigorous empirical studies both in China and in other developing nations. Future studies on how to integrate industrial strategies with development priorities and what governance institutions or structures might best serve these many policy goals can provide great insight into various policy alternatives that would be beneficial in the long run as well. 

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